Sequester. No, we are not talking about a group of jurors being sequestered in order to reach a verdict.

Rather, this sequester is the latest example of US political dysfunction and describes how billions of dollars in automatic budget cuts are set to hit the world's largest economy in the next few months.

Yesterday we touched on the birth of the sequester, today we will focus on its potential impact on the US economy.

How the sequester hurts?

So how exactly will US$109 billion be lopped from the government budget in 2013? Roughly half will come from defence spending and the other half will come from domestic spending.

What kind of spending are we talking about? Not the kind of wasteful spending that will be effective in reducing the US debt. Rather the cuts will be indiscriminately spread across both essential and non-essential government services.

Given the still fragile nature of the US economy, the cuts threaten to slow growth in number of ways. For one, firms reliant on government contracts will see a cutback in revenue, potentially leading them to shed staff.

Secondly, because government departments would be forced to pare budgets, public sector workers will likely suffer a combination of salary cuts and temporary unemployment.

The ensuing economic uncertainty could even lead individuals and businesses not directly affected by sequestration to curb spending and investment.

A US-based forecasting firm, Macroeconomic Advisers, estimates the sequester will lead to hundreds of thousands of job losses and a 0.6% drag on GDP for 2013.

How The Sequester Impacts The US Economy is a post from: Australian Stock Report Market Pulse Blog